Unfair but balanced commentary on tax and budget policy, contemporary U.S. politics and culture, and whatever else happens to come up

Tuesday, March 03, 2009

Paging Walter Blum

Walter Blum, an eminent tax scholar and professor of law at the University of Chicago when I arrived there in 1987 who was also a great mentor to me, used to say to his Tax I class, at the beginning of Day 1, that the Dean had just raised his salary. But the problem was that this would put him in a higher tax bracket. Didn't this mean that he should ask the Dean to rescind the raise?

Wally was a classic (though humane) Socratic-style teacher, so for this to work he had to find someone who would actually get it wrong and believe that the answer was yes, whereupon he could poke gentle fun for a while until the point emerged that this was just the marginal rate on the last dollar he earned - so he'd be ahead after tax from an extra dollar of salary no matter what.

Among the reasons I would never try this myself, in my Tax I class, is that I know I would get the right answer, preventing the gambit from working for me pedagogically as it did for Wally. Given this problem, a Chicago colleague once asked Wally how he made it work. He answered "I just look around the room until I see someone who I know is going to get it wrong." (This at the start of the first class of the semester, mind you.)

Well, apparently Wally was not the only one capable of finding someone who would get the marginal rate question wrong. ABC News found someone as well, and decided to hire her and give her a platform as a reporter on budget issues. Emily Friedman, it's time for your closeup. She has now posted a column guilty of exactly this fallacy, and therefore positing that lots of rich families will respond to the Obama budget plan by trying to drive their incomes below $250,000.

Jon Chait of the New Republic calls this the dumbest news report he's ever seen, admittedly a high standard.

As hilarious as Friedman's bonehead blunder itself is the classic reportorial method she uses to establish it. The article starts with a bunch of interview quotes from people who evidently are guilty of the marginal rate fallacy and are consequently making plans to get rid of clients and patients, etcetera. Then she quotes an expert who discusses the feasibility of getting below $250,000, but then says it won't really matter if you're at $249,999 or $250,001. This is not well explained or picked up on, however. Then Friedman goes with another "expert" who posits that Obama's proposal will lead to class warfare. Finally, back to the bonehead taxpayers who misunderstand how the proposal works, to close with a heart-tugging bit about how they're overtaxed.

In conventional mainstream media terms, the article is fine. After all, it is merely a viewpoint (albeit a true one) that the Obama tax plan would work as it actually works. It is also a viewpoint that it works differently from how it actually works. Friedman names her sources and leads with the ones who are more fun. Even if she knew the right answer, I suppose it wouldn't be "objective reporting" by her lights if she said so.

About Me

I am the Wayne Perry Professor of Taxation at New York University Law School. My research mainly emphasizes tax policy, government transfers, budgetary measures, social insurance, and entitlements reform. My most recent books are (1) Decoding the U.S. Corporate Tax (2009) and (2) Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (2006). My other books include Do Deficits Matter? (1997), When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (2000), Making Sense of Social Security Reform (2000), Who Should Pay for Medicare? (2004), Taxes, Spending, and the U.S. Government's March Towards Bankruptcy (2006), Decoding the U.S. Corporate Tax (2009), and Fixing the U.S. International Tax Rules (forthcoming). I am also the author of a novel, Getting It. I am married with two children (boys aged 24 and 21) as well as three cats. For my wife Pat's quilting blog, see Patwig’s Blog.